Business plan on a napkin?

So I’m sitting around the corner from our office, having breakfast at Il Fornaio, listening to the conversations around me and watching the entrepreneurs pitch the VCs on a Tuesday morning--The entrepreneurs are the ones carrying laptops and waiting impatiently – the Aussie entrepreneurs are the ones in suits ;-). Dado is here on time and talking animatedly about a new chip idea, sketching a business model on a napkin as the entrepreneur looks on and then starts to argue back ... its an interesting lesson in valley culture – VCs adding value? If you sit here every day for a month, I swear you would get a completely different view of how to pitch, plan, and execute a business.

There are basically seven things VCs focus on in evaluating a business: Team, problem (customer’s pain), solution (product), opportunity (size of pie), unfair advantage (technology or biz model), and competition. I know that’s only six ...

You should be able to communicate all these in a first meeting, with 10 Powerpoint slides (and one of those 10 is the title slide). You know the Samuel Clemens comment “I had send a long letter because I didn’t have time to write a short one.” It's very hard to encapsulate a business into 10 slides, but even harder to do so in a single sentence, or on the back of a napkin.

This does not mean you replace the business plans of old (well I for one could do without the 25 page appendix of financials that never turn out anyway), but the objective of your first meeting, is to secure the second. I know a famous VC here who, when confronted with confusion from an entrepreneur, will say “stop, here’s my business card, I’m going to the bathroom, while I’m gone write your business plan on the back and we can review when I get back.”

If you can do this (or on an Il Fornaio napkin), then you really understand what’s important about your business – that crystalization is what makes it worthwhile, it's what shows them your ability to focus on the art of getting things done and subsequently gets you funded (or at least into the next meeting).

Now there are well prescribed formats for VC pitches – look at any VC website. And I agree that a common structure makes it easier to focus on what’s being presented, but I also think a pitch has to be tailored to the style of the person giving it – if you present someone elses idea of a pitch it will diffuse your passion and make you less credible. Last week I listened to the same pitch more than 10 times given by each of two founders; it was amazing how credible the technical founder sounded when talking about how he developed the product by spending 10 years in an industry creating the same solutions for customers who didn’t really understand what the underlying problem was – he described the epithany (the "ah-ha" moment), and it fell into place – he was not polished, not stylish, and he didn’t even use the carefully manicured slide deck, but these were actually getting in the way of what he wanted to say.

You must be customer-centric. If you can answer every question about your business from a customer’s point of view, you will not only show that you understand who is really funding your business, but also that you are already moving from the typical tech leadership of a startup to the customer intimacy phase of a rapidily evolving company.

Remember, given that most humans (who said VCs were human?) can only remember three things from any presentation, you are up against it trying for seven, so make it easier with a few focused slides and well chosen words ;-)

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Posted by Anonymous to Larry's VC View at March 19, 2008 6:49 PM
I saw your ANZA presentation last week in Brisbane... thank you you had some great comments. Having just come back from a scoping trip to the US and UK where we met VC's from Silicon Valley as well as a few clients... our international expansion plans look very positive indeed. One question though... given the exchange rates specifically pound to the dollar...given that the VC we are interested in has offices in London and the valley, what would be your thoughts around the best way to raise the funds? From the UK or Valley office... or how do you think the VC's would view it. I guess my logic is this.... raising $5mill from the valley office means that in the UK that's just been halved, however raising 5 million pound from the UK office is just that to them but its suddenly $10m in the US. I appreciate any comments.

Mate, this is the wrong question, you need to be focusing on which partner in which fund can add the most value to your business – ideally, someone who has built a company like yours theselves, or at least invested in a bunch of them, who can realy help you avoid the pitfalls of others. There is little to your arbitrage concern, since its where you will build your business that will determine $ leverage, and at best it’s a 2nd, possibly 3rd order effect anyway. Don’t get wrapped around eth axle on these things, focus on value not valuation; getting the deal done, not negotiation; and good luck with your deal.

Posted by Anonymous to Larry's VC View at March 25, 2008 3:53 AM
Great advice Dr Larry. So it's now almost 3 years since that 2005 VC tour to Australia. From your perspective, is the substantial need still unfulfilled, or did things change during/after that visit?

Dear Dr Anonymous – it was the “hole” in the ecosystem that made us want to form our fund, as entrepreneurs to try and serve that need better and fill that hole – so yes the need and “hole” still exist, but I am hoping we can make it better. Interestingly, our presence seems to have started to slightly change the behavior of other funds in that market……will write a Blog on this soon – thanks for the question!